Compliance and Tax

Authority

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 Compliance
In general, compliance means conforming to comply with relevant laws or regulations

Administrative compliance.
Complying with the administrative rules of lodging and paying on time.

Technical compliance Taxes calculated in accordance with the technical requirements of

the tax laws or taxpayers pay their share of tax in accordance with the provisions of the tax
laws).

Technical compliance requires tax authority to have

Full knowledge about the impact of tax changes to the market and consequently on tax
revenues;

The technical skills to take into account all these factors when estimating the tax payment.

Existing information about the tax trend paid by companies and their market operations in
order to measure technical compliance.

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 Compliance
Reporting requirements: should be
Embedded into the regulatory system, and,
Compliance data should be part of the reporting requirements
(e.g. Quantity and value of produced, exported, imported tobacco
products, and taxable amount of each types of brands and products)

Compliance data: is a set of data provided to the tax

authority by the manufacturers
For the purpose of implementing or validating compliance,
consistency and completeness.

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 Compliance
Reporting requirement
Tax authority need to
Identify the level and the areas of low compliance and
Determine what strategies they need to adopt in order to
increase compliance with respect to
better enforcement,
legislative support,
risks analysis and
information sharing at central or district level actions etc.

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 Strong Tax authority

Types of manufacturing Identify useful tools

Production capacity Data needs & analysis
Revenue stream Technical capacity
Leaf production for Strong tax legislation
domestic consumption Human resources &
Possible fraudulent new technology
Strategies
activity Risk to address
assessment risks

Centralized monitoring
system,
centralized data gathering
Evaluate Implement and data processing
Revenue
strategies strategies electronic data reporting
Consistency
Cost and monitoring
Changing market auditing
Sustained know-how survey and second hand
data

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 Enforcing Compliance
In high-income countries, excise taxes can be administered by:
relying on the taxpayer to submit tax returns and,
then auditing the taxpayers account books.
Countries with less established compliance systems, have
difficulty measuring and ensuring the compliance, in
consequence, they take a mix of measures to improve taxpayer
compliance:
Negotiation with the manufacturers
Physical control over the products
Licensing and tax stamps
Electronic monitoring

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 Physical Controls
Effective tax administration systems check the production and stocks by
controlling the shipments into and out of tobacco production facilities

Traditional Process
The producer makes:
Records made available for inspection by the tax authority on a regular basis, usually
monthly.

The tax authority:

Periodically take stock of the products at hand and checks against the
taxpayers production and shipment records.
Control can also include checking inventory by counting cigarette packs.
An employee of the company may perform the actual measuring under the
supervision of a tax official.
To help ensure integrity, the tax authority frequently rotate the control official
among different locations, and have the supervisor make surprise visits.

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 Physical Controls:
Examples of traditional process
High-income countries have, in the past, adopted intensive
physical controls on excisable goods.

Scotland:
Each whisky distilleries had a resident excise officer who lived in a
provided house next door to the distillery and the official locked on their
entrances, exits, and key areas of the production process and no activity
could take place without the officer being present to unlock the locks.

United Kingdom:
Each bonded warehouse used to have a resident officer who had to unlock
and lock the warehouse.

Now, the UK relies on the warehouse keeper to exercise day-to-day

control, with official control based on spot checks and systems of audit.

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 Physical Controls:
Examples of traditional process
Currently, a number of developing countries also exercise intensive physical
controls on cigarettes.
India
A tax official stationed 24/7 to large tobacco producing facilities and are rotated
periodically in order to avoid fraud.

Pakistan
Manufacturers periodically provide the production and price of cigarettes in each
district tax authorities where the information from each district is collected in
Federal Board of Revenue

Problem:
1. The potential for fraud by the excise officer cannot be eliminated fully.

2. Costly process , since it requires more HRs to involve in countries where tobacco products
vary widely and produced a large number of manufacturers including large to cottage
industry.

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Physical control: Monitoring Production
Excise Tax Stamps
Excise stamps are another method of ensuring:
payment of excise tax and
that goods for which the tax appropriate for one jurisdiction
has been paid do not get shipped to another.

How to sell stamps:

Either sell these stamps to the taxpayer to collect money in
advance, or
provide stamps to bonded producers with payment delayed
until the excise is otherwise payable.

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 Administering Stamps

Cigarette manufacturers apply the excise stamp

directly to the pack as part of the manufacturing
process.

For instance, stamps are often affixed to cigarette

packs before the final cellophane packaging is applied.

In some countries, costs of stamps under the

manufacturers, and in some under the governments
responsibility

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 Physical Controls: loopholes with stamps
Governments must maintain total control over both the excisable good
and the stamps
In many countries, the excise stamps are re-used and/or are easy to
counterfeit.
To limit such activity, require stamps that are of:
high quality,
difficult to duplicate,
serially numbered, and
adhere to the package so that they break when the package is
opened.
Stamps serve little purpose in control unless:
their use is monitored at the retail level and
retailers believe that the stamp program is being strictly
enforced.

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 Efficient & Effective Physical Control
Effective tax administration systems check the production and stocks by
controlling the shipments into and out of tobacco production facilities

Process of electronic monitoring system

The producer makes:
Records made available for inspection by the tax authority on a
regular basis, usually by monthly.

The tax authority

Monitors production with a technology (tracking and tracing system)
and checks against production and shipment records made available
by producers.
Creates a data base and periodically checks the production, shipment
and stock of the products at hand and compares against the
taxpayers records.

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 Efficient & Effective Physical Controls
Effective tax administration systems check the production and stocks by
controlling the shipments into and out of tobacco production facilities

Electronic monitoring system (please see details in presentation 5.3)

Enables tax authority to control illicit and counterfeit cigarettes and
tobacco products
Informs tax authority about the production and importation of types of
brands and their shipment
Enables tax authority to estimate and realize expected revenues
Improve manufacturers' compliance in reporting production and
paying its tax liability in full.
Applies tax stamps that are relatively difficult to counterfeit.

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 BEST PRACTICES

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 Best Practice for Strengthening Tax
Administration
Enhance Compliance
Improve technical capacity of tax authority and sustain in house
technical knowledge
Improve monitoring of production and trade activities
Implement high technology that enables tax authority to assess and
validate tax payable portion of production
Support comprehensive tax law to close loopholes that enables
tax avoidance

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 Best Practice for Strengthening Tax
Administration
Improving technical capacity of tax authority

Availability of skilled human capacity

Establishing data centers and data processing

Coordinating tax analysis and information gathering at center level

Conducting risks analysis

Availability of technical tools and skills required by tax authority to understand the
background of
Impact on taxes on consumer prices
Impact of consumer prices on consumer demand
Impact on changing demand on price bands and on expected revenues
Market characteristics and the industry production & pricing strategies

Developing comprehensive auditing technics &

Ensuring sustainability of know-how knowledge within tax authority

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 Best Practice for Strengthening Tax
Administration
Improve monitoring of production and trade
activities
Centralizing monitoring system - Required
Good- Increasing frequency of rotation by tax officials and
keeping 24/7 rotation cycle if human monitoring is applied
Best- Applying new technologies and innovative ways of
monitoring
Electronic report filing by tax payers
Electronic monitoring on production and trade
Assessment of production capacities of manufacturing facilities to
increase compliance.

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 Best Practice for Strengthening Tax
Administration
Legislative support for tax authority
Improve legislative process by tax laws that require
manufacturers to reveal confidential information to tax authority that
includes price, production level, producer prices, costs of production etc.
Require manufacturers to comply with the reporting requirement within a
specific time intervals monthly, quarterly, annual to tax authority.

Imposing regulation on the operations of the tobacco

businesses,
obtain trade licenses ,
register for a trademark as per the provision of trademark act

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 Best Practice for Strengthening Tax
Administration
Legislative support for tax authority
Limitative measures
to entry into and operations of tobacco business- Brazil, Indonesia
on the way products produced- Bangladesh.
On restrictions affecting the content of the tobacco products Turkey,
Pacific Islands

Improve tax and price policies to close loopholes and

eliminate ambiguity on industry price strategies
Impose minimum price policies - Brazil
Impose minimum tax level European Union, Russian Federation,
Ukraine, Turkey, Kenya,
Simplify tax systems Egypt, Kenya, Philippines

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